In Europe this week, French and German manufacturing PMI data fell short of expectations and a key measure of German business sentiment (IFO business climate index) reached a six year low. In the wake of disappointing forward-looking economic data, the ECB left monetary policy unchanged which weighed on European equity markets and also saw the Euro hit a two year low versus the US Dollar.
Whilst the ECBs decision may have disappointed some investors, the statement from the ECB guided to “interest rates being at their current level or even lower until the middle of 2020”. The addition of “or even lower until the middle of 2020” leaves open the prospect that the ECB will ease monetary policy at their next meeting. Additionally, during the press conference, the ECB President Mario Draghi made several dovish remarks further bolstering expectations of a policy response in September.
US GDP for the second quarter of 2019 came in at 2.1% on an annualised basis, beating expectations of 1.8% thanks to stronger than anticipated consumer and government spending. Whilst growth beat expectations, exports and inventories were down, and business investment fell for the first time in three years. With trade tensions evidently weighing on the economy, investors remained optimistic that the Fed will cut interest rates next week, despite headline GDP beating consensus forecasts.
The Fed announces monetary policy next week and is expected to cut interest rates for the first time in over a decade by 0.25%-0.50%, investors will certainly be disappointed if the Fed fails to act. In addition to the US, next week the UK and Japan will provide updates on their monetary policy and trade talks between the US and China are set to resume. The last couple of weeks have been busy with companies across the globe announcing their half year results and that continues next week, with many big names updating investors on their performance.
Peter Quayle, Fund Manager